Auditing standards require the auditor to obtain an understanding of the entity and its environment as a basis for assessing the risks of material misstatements. Business models differ across organizations and industries, leading to unique business processes needed to account for transactions. While the core business functions for the sales and collection cycle discussed in this chapter are generally relevant to all organizations, the underlying business processes and related documents and records are often unique to each organization. Below are four descriptions of different businesses.
1. The Starbucks Coffee Company sells regular and specialty coffees and teas in over
24,000 stores spanning more than 70 countries. Customers use cash, debit or credit
cards, pre-paid Starbucks cards, or mobile payment apps to purchase individual
drinks that are served to them within minutes.
2. Amazon.com is one of the world’s largest online retailers of all kinds of products.
While the company was originally known for its huge selection of new and used
books, consumers can now find a wide variety of products available at the Amazon.
com website.
3. Most people have a personal physician who provides medical care when needed, in-
cluding annual physicals and other medical services. Patients make appointments to
be seen by their physician, who examines the patient and prescribes treatments and
medications when needed. Insured patients often pay a co-payment, with the balance
paid by the insurance company.
4. The majority of universities generate a significant portion of their revenue from
tuition. Universities bill students in advance for classes that will be taken in an up-
coming term. For full-time students, most universities charge a set tuition amount
after students enroll in a minimum number of courses per term.
Analyze each of the above independent business scenarios to answer each of the following questions:
a. Using the eight business functions for the sales and collection cycle illustrated in
Table 14-1 on page 457 as a guide, briefly describe the underlying business processes
related to each of the eight functions for the sales and cash collections for the above
independent scenarios.
b. What documents or other source evidence would you use to test the occurrence
transaction-related audit objective for sales for each of the four scenarios?
c. For which of the four scenarios would the sales returns and allowances business function not be applicable?
d. For which of the four scenarios would the write-off of uncollectible accounts and bad debt expense business functions not be applicable?
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